Download economic insight SOUTH EaST aSIa Quarterly briefing December 2011 global uncertainty unsettles

economic Insight
South East Asia
Quarterly briefing December 2011
Global uncertainty unsettles
markets, but will it unsettle
ASEAN growth?
Welcome to the second issue of the ICAEW Economic
Insight: South East Asia, a new quarterly forecast for the
region prepared directly for the finance profession.
Produced by Cebr, ICAEW’s partner and acknowledged
experts in global economic forecasting, it provides
a unique perspective on the prospects for South East
Asia over the coming years. We mainly focus on the
largest economies of the Association of South East Asian
Nations (ASEAN) – namely Indonesia, Malaysia, the
Philippines, Singapore, Thailand and Vietnam.
Since the last edition, market concerns about the
eurozone have been rising ever higher and the currency
union appears to be heading towards further problems,
with supposedly final agreements proving temporary
and insufficient. This has severely undermined business
and consumer confidence, leading us to revise down
the growth forecast for the region, whereas that for the
US looks broadly unchanged. Most commodity prices
have started to come down as expected, although
oil still remains higher than anticipated. The large
ASEAN economies have started to be affected by rising
uncertainty about Western economies, leading regional
governments and central banks to revise national
growth forecasts down.
The US appears sufficiently resilient to avoid a recession,
but its economy will take a long time to get back to
sustained high economic growth. So many houses are
being sold cheaply due to foreclosure that new building
is weak. With mortgage delinquencies rising again,
more properties will have to change ownership from the
over-indebted to those with spare savings before new
building relieves the labour market.
BUSINESS WITH CONFIDENCE
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The US housing bust indirectly catalysed another crisis,
namely that of eurozone sovereign debt. The recession
exposed weak economies previously sheltering behind
the solid euro. Since then, in a distant echo of the
Asian Financial Crisis, contagion has been spreading
from country to country. Bond spreads measure the
temperature of feverish speculation and the question is:
who will succumb next? So far, the proposed remedies
have proved ineffective as they only treat symptoms.
Close fiscal union or exit are the obvious cures, but this
pill still seems too bitter to swallow. So should ASEAN
prepare for a global downturn?
ASEAN growth to diverge from advanced
economies
The short answer is ‘no’. Although they are dramatic
events that will shape the region, the troubles of Europe
should not derail the train of prosperity. ASEAN’s
economic growth prospects easily outpace the sluggish
US and eurozone and also leave the rest of the world
trailing. Of course, the headline figure of annual GDP
growth of 4.8% in 2011 glosses over country-specific
developments, which are addressed below. But although
the world’s major economic blocks are slowing to about
1.6 % year-on-year growth this year and just 1.0% in
2012, ASEAN is forecast to plough on, maintaining its
rate of output expansion next year.
Figure 1: Comparison of annual economic growth
rates by region, annual percentage change
%
8
6
4
2
0
-2
-4
2005
2006
2007
ASEAN
2008
2009
World
2010
2011
2012
2013
US and eurozone
Source: IMF, Cebr analysis
This contrasts with the general world economy, which
is expected to slow due to the travails of the West and
an easing of China’s ferocious march. This should, in
turn, have a dampening effect on commodity prices.
In summary, commodities producers, industrialised
economies and the Asian giants China and India are
predicted to slow in 2012. But we think ASEAN should
be able to keep going relatively undisturbed, due to the
strength of its domestic demand and growing regional
economic integration. For instance, trade with China
should expand steadily even if its economy slows to
about 7.5%, which is the soft landing scenario. Even
this lower growth rate would, after all, still result in an
enormous absolute increase for the world’s secondlargest economy.
Looking further ahead, ASEAN GDP growth should
pick up in 2013, driven by Indonesia. With nearly 40%
of regional output, the world’s most populous Muslim
country is the major factor in determining the overall
growth rate of the 10 member states. As global growth
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starts rising again in 2013, South East Asia is expected
to benefit, raising its weighted growth rate to 5.4%.
By this time, the emerging markets will again have
outpaced the advanced economies, making the latter
a progressively smaller part of the world economy.
Figure 1 illustrates that the world average growth rate is
moving away from the West towards emerging markets.
In other words, Asia is becoming the main factor in
world growth, and ASEAN plays an important role in
this global shift.
Export growth continued into Q3 2011,
but is likely to slow markedly
Export volume figures show that ASEAN has overtaken
the emerging market average compared to the trade
volume during the financial crisis. The latest available
data from around the middle of the year shows a
small downturn in trade, whereas our focus region
kept expanding its foreign sales. This completes the
turnaround from the depth of the financial crisis, when a
collapse of export orders hit the region especially hard –
exports are up around 80% compared with the bottom
reached in Q1 2009.
The strong turnaround of fortunes is a testament to
the economic prowess of ASEAN, but it also highlights
the dependence on outside demand. Cautionary signs
of a possible export decline have emerged from trade
indicators such as IATA’s air freight figures, down 2.7%
year on year in September, and the number of ships
passing through the Suez Canal falling 3.2% year on
year. These show a slowing of trade in the third quarter,
in line with weaker industrial growth and retail sales in
many major economies.
While China has been the main focus of attention, it is
only a matter of time until India also starts to suck in
growing import volumes as economic growth creates a
surge in middle-class consumers. A Malaysian free trade
agreement that came into effect on 1 July appears a
smart move, considering that by 2030, India is forecast
to be the world’s biggest country with a population of
1.5bn. Regardless of bright future prospects, ASEAN’s
growth drivers have already changed. Exports are
increasingly serving domestic consumption rather
than being the historical growth drivers that made
the Asian Tiger economies models of development. As
pointed out in the previous edition, that means a smaller
export contribution to GDP as economies mature into
significant markets in their own right.
Figure 2: Export volume index; September 2008 =100
120
110
100
90
80
70
60
2008
2009
ASEAN
2010
Emerging
Markets
2011
World
Advanced
Economies
Source: CPB, IMF DOTS, Cebr analysis
economic insight – south e a st a sia
December 2 011
Country focus: Malaysia
Malaysia is a microcosm of the ASEAN as it combines
nearly the whole range of economic activities found
throughout the region. The country has a wealth of
natural resources, supplying palm and mineral oils for
the world market. A highly developed electronics
industry competes with other world leaders in the field.
In services, a burgeoning tourism industry brings
employment to remote areas, with international arrivals
having grown an annual average of 12.9% since 2000,
while the world-leading Islamic finance industry
underlines aspirations to expand business services.
With more than one in five ringgit worth of goods
going to China according to the latest IMF data, it has
become the largest export market for Malaysia; this is
opening fresh opportunities while traditional customers
from Europe and the US struggle with structural
problems that will limit economic growth.
Despite these successes, with 2010 per capita GDP
of $8,200 the country remains caught between
predominantly rural Asian economies (which earn
below $5,000 per capita), and the newly industrialised
countries (upwards of $18,000 per capita). While
investment in infrastructure offers the prospect of
increasing competitiveness in manufacturing, the large
geographical size of the country probably limits the
scope for full-scale industrialisation seen in countries
such as Korea or Taiwan, which are three and ten times
smaller respectively. Although well-diversified, the
country’s economy is highly sensitive to global demand,
demonstrated by swings of over eight percentage points
in annual GDP growth during recessions.
Looking ahead, a rising middle class is likely to temper
this variability somewhat as rising incomes allow a more
inward-focused industrial structure with a growing
service sector share of output. The Asian Development
Bank estimates that 64% of the population will have
joined the middle class by the end of the decade.
This evolution is evident in the increase in domestic
consumption shown in Figure 3, supported by both
rising wages and the development of consumer credit.
The refocusing of the economy away from the West
towards Asia and more stable domestic demand driven
by a general increase in living standards should facilitate
the gradual move to high income status.
ASEAN inflation will come down
in 2012, but only temporarily
Strong economic growth will bring elevated inflation in
its wake, with various factors pointing to structural price
increases in future. A major factor influencing inflation
in the region is the Chinese labour market, which used
to offer a seemingly infinite source of cheap workers.
An increase in nominal rural wages exceeding 20% this
year (and still accelerating) has reduced the incentive
of migrant workers to move, cutting labour supply in
coastal manufacturing centres. A spike in wages, as
well as the emergence of organised labour demands
for better pay and conditions, means that imported
deflation from cheap Chinese products will probably
be a thing of the past.
In fact, China is likely to turn from a deflationary factor
for the world economy into an inflationary one as its
thirst for commodities has sent prices soaring. Although
commodity prices should dip in 2012 – non-oil
commodities have already fallen about 10% from their
peak – it will probably take a long time for rising
production to meet surging demand, with structurally
higher prices the logical outcome. The implication of
structurally higher inflation is tighter monetary policy,
which in turn implies a reduction in the potential
growth rate for a given level of inflation. The upshot
from this is that ASEAN countries will either have to live
with faster price rises or lower growth – see projected
inflation rates in Figure 4 that are in line with growth
forecasts further down. Singapore has had higher
inflation than Malaysia since its emergence from the
financial crisis, driven by high economic growth in the
period and a tight labour market. This anomaly of the
wealthier economy growing faster and seeing quicker
price rises is expected to reverse as the Singaporean
economy enters a new era of slower growth.
Figure 4: Consumer price index, year-on-year change
%
12
10
8
6
4
2
0
Figure 3: Malaysian household consumption
expenditure and GDP growth, annual change
-2
-4
2007
2008
2009
Indonesia
%
12
10
2010
2011
Malaysia
2012
2013
Singapore
Source: IMF, Cebr analysis
8
6
4
2
0
-2
-4
-6
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Malaysia household consumption
Malaysia quarterly GDP growth
Source: IMF, Department of Statistics Malaysia, Cebr analysis
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With the population putting greater emphasis on
stable prices, we expect the Monetary Authority of
Singapore to trade some output expansion for higher
price stability. As a consequence, Singapore’s annual
rate of consumer price inflation is expected to fall
gradually to about 2.0% as commodity prices fall and
then increase slightly to about 2.5% by the end of
2013. In addition to healthy growth, a reduction in
food and fuel subsidies and the planned introduction
of a value-added tax in Malaysia will fuel inflation there
despite falling commodity prices. This should result in an
annual CPI increase of 2.9% in 2012 and 3.2% in 2013.
In Indonesia, strong growth due to strong investment
spending and rising domestic demand should fuel price
economic insight – south e a st a sia
December 2 011
rises, fanned by limited infrastructure. The outcome is
projected to be inflation of 5.0% in 2012 and 5.9% in
2013 – higher than in Singapore and Malaysia, but a
reasonable rate for a fast-growing emerging market.
Mixed performance at the country level
in 2012
Middle income countries to pace ahead
Many of the factors regarding Malaysia have already
been discussed in previous sections. As a result of
slowing demand for electronics products and falling
commodity prices, as well as pressure on household
budgets due to higher taxes and subsidy cuts, we
anticipate a slowing of GDP growth from 4.5% in 2011
to 4.3% in 2012. An upturn of the electronics cycle as
well as solid consumption spending should support the
economy in 2013, pushing annual growth to 5.6% for
the year.
Splitting the ASEAN members into country groups
(as defined by the World Bank) reveals some
divergence in annual GDP growth rates. For one, the
high income economies Singapore and Brunei have
been more affected by the global financial crisis than
the other groups. They are expected to grow by 4.8%
in 2012 and 3.6% in 2013. Brunei’s dependence on
petrochemicals makes it vulnerable to swings in energy
prices, while Singapore’s economy is mainly externally
focused in both the industrial and service sectors. The
strong growth of high-income countries is projected to
moderate, falling to the bottom of the comparison in
the next two years.
Figure 5: Growth rate forecast by World Bank
country grouping
%
14
12
10
8
6
4
2
0
-2
2007
2008
2009
2010
2011
2012
2013
Low income
Lower-middle income
Upper-middle income
High income
Source: IMF, Cebr analysis
At 5.4% in 2012 and 6.1% in 2013, the highest
growth rate is expected from lower-middle income
countries, a group which comprises Indonesia, Laos, the
Philippines and Vietnam. These countries, and especially
Vietnam, are expected to benefit from rising labour
costs in China, which is likely to lead to a shift of light
manufacturing to lower-cost countries in the region.
Relatively small export sectors and rising domestic
demand is another main factor, which has the added
benefit of insulating economies from external shocks –
as evidenced by stable growth for this group throughout
the financial crisis.
With their limited links to the world economy due to
a small export base, low income economies Myanmar
and Cambodia were also little affected by the global
recession. Upper-middle income economies Thailand
and Malaysia were badly hit, on the other hand,
compensated by a larger post-recession bounce. Both
groups are expected to grow by similar rates, namely
around 4.2% in 2012 and 5.0% in 2013.
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In this section, we address the outlook for selected
ASEAN economies, summarised in Figure 6.
Indonesia followed emerging markets Turkey and Brazil
in cutting interest rates even though inflation was still
high. An attempt to head off the effects of the slowing
global economy on the country and to discourage hot
money inflows probably contributed to the decision. If
economic stability can be maintained, strong investment
and domestic consumption should support growth of
5.6% in 2012 despite worsening terms of trade, 0.6
percentage points lower than in 2011. These factors and
rising exports should continue to support the country,
resulting in growth returning to a level of 6.2% year on
year in 2013.
An unexpected and sudden turn towards a more
democratic process in Myanmar is opening up
new perspectives for the country. If maintained, an
increase in tourism from a low base, as well as foreign
investment, is likely to give a boost to an economy
with fast-growing ties to giant neighbour China. This
may make up for some delays to a massive hydropower
project with significant environmental and social
consequences put on hold due to popular discontent –
another new development for the country. For 2011, we
expect growth of just 3.0%, rising to 3.8% in 2012 and
4.6% in 2013.
Figure 6: Country-level GDP growth forecasts
%
7
6
5
4
3
2
1
0
Indonesia
Malaysia
Myanmar
2011
Philippines Singapore
2012
Thailand
2013
Source: Cebr analysis
economic insight – south e a st a sia
December 2 011
The Philippines was hit by weak exports, especially
electronics products, this year after a healthy growth
in the first quarter. Strong private demand held up the
economy, but a bump in imports is expected to bring
annual growth for 2011 to just 4.3%. Despite strong
consumer spending growth, a chronic lack of investment
in infrastructure holds the country back, making the
success of an announced public-private partnership
scheme important for future prospects. Assuming some
success on this measure, we anticipate annual GDP
growth of 4.5% in 2012 and 5.2% in 2013.
falling from about 4% to just 2.3% due to the standstill
of Bangkok, which accounts for around 40% of GDP.
Although ultimately destroying wealth, natural disasters
often boost growth in their wake due to reconstruction
efforts. To some extent, repairs and rebuilding should
support the economy and substitute for weaker export
markets next year. Coupled with strong consumption due
to public transfers, this is expected to lift growth in 2012
to 4.4%. A global recovery and strong output expansion
in neighbouring countries should result in a further
growth increase of 0.2 percentage points to 4.6% in 2013.
Elevated inflation and a widespread perception of
excessive immigration are leading to some discontent
in Singapore, but unemployment remains near 2.0%.
Prime Minister Lee Hsien Loong announced that the
government had reduced its growth target to 3–5%,
compared to performance of 7–8% previously. For
2011 and 2012, we expect annual GDP growth of 4.9%
and 3.7% respectively. Benefiting from its position
as a regional business service hub and a competitive
industrial sector, Singapore’s growth should rise to
about 4.1% in 2013.
These forecasts are based on a scenario of a weak
economic environment in the Western economies, but an
avoidance of outright, sustained recession. The eurozone
debt crisis has the potential to seriously undermine this
outlook by threatening the stability of the banking system
and by pushing consumer and business confidence further
down. The other main risk that may derail the global
economy is a possible collapse of the Chinese construction
sector. Although unlikely due to the ability of the state to
stimulate the economy via credit and fiscal means, falling
house prices may lead to a contraction in credit and thus
a sharp slowing of the real economy. Currently, however,
it appears that the eurozone may avoid an implosion and
that China can engineer a soft landing.
The unusually heavy monsoon rains that hit Thailand
are wreaking havoc on the country’s economy. The GDP
growth forecast for 2011 was revised down sharply,
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